What's Risky?

September 30, 2008   

"Will my Money Market fund be there tomorrow?" "Is my savings account safe?"

As this financial crisis progresses, we're hearing phrases like these whispered more and more.

What we once thought were risk-free investment vehicles now carry disproportionate risk, leaving people to consider making a run on their banks.

What times are these?!

However, in the early stage investing world, relative to the rest of the financial markets, times aren't changing very much at all.

As recently as two weeks ago (post-Lehman), the New York Angels -- a relatively conservative Angel group, considering its proximity to Wall Street -- polled its members and found that the amount of investors looking to invest less, the same, or more in the coming year was a healthy bell curve.

Readers of popular VC and Angel blogs, like AVC and Information Arbitrage will also find a relatively optimistic tune being sung; and my own boss, David S. Rose, falls in line with those NY Angels who will likely invest the same, if not more, in the coming year.

"Excellent start-up prospects will continue to get funded and grow, even in today's hostile environment," reports Roger Ehrenberg.

Fred Wilson also added today,

I don't think we are in a "depression" in startup land. We are in a down cycle driven by a bad global economy. I think the web and information technology is one of the few bright spots in an overall gloomy economic outlook...

The tools and services that are made in the web technology business are only going to increase in demand over the next five years.

Of course, wise investors, such as Fred and Roger and David, while optimistic, aren't stupidly so -- and they do pepper their optimism with a more cautious tone now than a few months ago.

But, what's absolutely remarkable here, is that the early stage investing market -- at both ends of its spectrum (VC and Angel) -- have become only slightly more risky when compared with more traditional investment markets. That is: the relative risk of the early stage game is disproportionately lower than other investments, given that when the market returns from this slump, new companies started should be poised to bring greater gains to their investors.

All this then begs the question: What's risky?

Is it less risky to put your money in startups vs in a savings account? On balance, no, but ask that to a Washington Mutual customer and they may hesitate a little before asking.

Are you better off extending a line of credit to an existing company than taking equity in a zero-revenue prototype? Again, on balance, probably not -- but for more and more financiers, the early stage investment will be more on par with their appetite for risk and reward.

Mash up the shifting landscape of risk and reward with the opening of the early stage investment game (look at the path Angelsoft is on) and the continuing lowering of early stage barriers, and one of the most significant results of the market could be a tetonic shift of what "risk" looks like in the early stage investment game.

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